Europe's Defense Turnaround 2026: Record Spending, Major Maneuvers, and the Persistent Production Gap

The security policy architecture of Europe is currently undergoing the most profound transformation since the end of the Cold War. The NATO Annual Report published on March 26, 2026, documents a twenty percent increase in defense spending by European allies and Canada in 2025 — a historic leap that sustainably shifts the defense policy gravity of the alliance. At the same time, the European Union is intensifying its industrial policy instruments, and the largest maneuvers in decades are taking place on training grounds from the Baltic Sea to the Black Sea. However, behind the impressive numbers lies a structural dilemma: the production capacities of the European defense industry are not keeping pace with the political will for rearmament.

According to consolidated EU figures, defense spending by the twenty-seven member states reached a volume of 343 billion euros in 2024, which corresponded to 1.9 percent of the gross domestic product. For 2025, the European Defense Agency estimates total spending at around 381 billion euros at 2024 prices — approximately 392 billion euros at current prices — thus accounting for 2.1 percent of economic output. Particularly notable is the development in investment spending, meaning those funds that flow directly into new capabilities: 106 billion euros in 2024, an increase of 42 percent compared to the previous year. For 2025, around 130 billion euros is expected. The procurement of military equipment alone amounted to 88 billion euros in 2024 and is expected to exceed the 100 billion euro mark in 2025. These figures are no longer expressions of temporary crisis response but demonstrate a structural trend — the turning point has arrived in the numbers.

At the NATO summit in The Hague in June 2025, the alliance states agreed on a new defense investment commitment: five percent of GDP by 2035, divided into 3.5 percent for core defense and up to 1.5 percent for security-related expenditures. This makes the previously discussed two percent mark, considered a ceiling, the new floor. Poland, already the leader in the alliance with 4.7 percent of GDP in 2025, aims for the five percent mark in 2026. Estonia adopted a defense development plan with a volume of over ten billion euros for the period 2026 to 2029, focusing on air defense, long-range precision strike capabilities, and ammunition stockpiling. Germany increased its defense budget in 2026 to 108 billion euros and adopted the Bundeswehr Procurement Acceleration Act as a tool to streamline the notoriously slow procurement processes. France announced in December 2025 the construction of a new next-generation aircraft carrier to replace the Charles de Gaulle, with planned costs of around 10.25 billion euros and an operational target date of 2038. In Italy, the government requested 2.4 billion euros from Parliament for the modernization of the frigate fleet over a period of fifteen years. Even smaller states are pooling their resources: Estonia and Latvia have been negotiating since 2023 with the German manufacturer Diehl Defence for the procurement of the medium-range air defense system IRIS-T SLM.

At the operational level, the new seriousness is manifesting in an unprecedented density of exercises. The exercise Steadfast Dart 26, which started in January and concluded in March, tested for the first time the deployment of the Allied Reaction Force (ARF) via sea, land, and air routes from Turkey, Italy, and Spain to Germany and the Baltic region. Sword 26, the successor operation to the previous DEFENDER-Europe series led by USAREUR-AF, has been ongoing since late April and into May across eight countries from the High Seas to Poland. Concurrently, Neptune Strike 26-2 is exercising the integrated strike capability of the alliance in the Mediterranean, the North Sea, and with adjacent activities in the Baltic, Central Eastern European, and Black Sea regions, with a French and an American carrier strike group. In Orzysz, Poland, the Amber Shock 26 maneuvers began with over 3,500 soldiers, including units from the 2nd US Cavalry Regiment and Polish forces, focusing on troop deployment and multinational coordination. The exercise culminates in live-fire combat exercises with live ammunition. Additionally, there are the annual constants: Dynamic Mongoose 26 starting May 18 with anti-submarine warfare scenarios in the North Atlantic, Ramstein Flag in June with complex multidomain air combat exercises over Finland, Norway, Sweden, Spain, Romania, as well as the Mediterranean and the Gulf of Finland, and BALTOPS 26 in June in the Baltic Sea. Three year-round Sentry operations — Baltic Sentry, Eastern Sentry, and Arctic Sentry — also maintain a permanently heightened state of readiness along the entire NATO eastern flank.

However, the leap from budgets to deployable capabilities proves to be the central problem of the European defense turnaround. An analysis by Goldman Sachs Global Investment Research shows that demand for defense goods in Germany has more than doubled since 2019, while production has only increased by about a quarter. Demand is thus growing five to six times faster than supply. The European defense industry has been optimized for shrinkage and efficiency over decades — not for scaling and sustainability. Major programs are delayed and over budget, while smaller suppliers struggle with procurement processes tailored to established large corporations. Additionally, there is a capital market problem: despite exploding order books, European defense companies distributed dividends and share buybacks amounting to around five billion dollars in 2025, instead of investing the funds in building additional production capacities. ESG-based investment policies, which classify defense investments as a reputational risk, exacerbate the financing gap. In Norway, parliamentarians criticize the rules that prohibit the state pension fund from investing in defense companies like Lockheed Martin — while the Norwegian state simultaneously procures 52 F-35 fighter jets from the same manufacturer.

The Brussels institutions are trying to counteract this. The EU budget for 2026, with a volume of 192.8 billion euros in commitment appropriations, places a clear emphasis on defense and strategic resilience. With SAFE (Security Action for Europe), the EU has provided a 150 billion euro instrument for joint procurement and industrial scaling; the first plans for eight member states were approved in January 2026. The European Defense Industry Program (EDIP) allocates 1.5 billion euros in grants for 2025 to 2027, of which 300 million euros are for a special Ukraine support instrument. Nevertheless, the EU budget remains modest compared to real defense needs — Brussels can complement national investments but cannot replace them.

The strategic implications are far-reaching. While the Pentagon is reportedly considering the withdrawal of about 5,000 soldiers from Germany, the question of European capability for independent deterrence is gaining urgency. The US National Defense Strategy 2026 explicitly states the expectation that European allies should take the lead against threats in their area — with American support, but not under American leadership. The transition from political statements to deployable military structures critically depends on whether European states can establish the industrial base for credible independent defense in the next two to three years. The figures from the NATO report of March 2026 show that the will is present. Whether production follows remains the crucial open question of 2026.